It May be Wise to Convert
Given the recent market downturn, it may be wise to convert your Traditional IRA to a Roth IRA. If your income is less than $100,000, then you are eligible to do it.
The idea here is that if you are eligible to do such a conversion, then it may be wise to do it because you would pay income tax on the reduced value (given the recent downturn in the market) and then when the value grows in the future, you would owe no income taxes on the gain. The goal would be when the account recovers after the conversion, then the taxes paid on the conversion will have been made up in the gain and further gains would come out tax free (assuming they were held for five years). As you can imagine, this could be a smart tax planning move and may well just be the opportunity that the recent market malaise creates.
Each and every case requires special consideration. Generally, earnings on the assets in a converted Roth IRA would come out tax free only after five years has passed since conversion. So, for this strategy to work, you would need to have a time horizon of at least five years. The good news is that if you needed some of the converted funds right away (after you had paid income taxes on them) and you had already attained the age of 59 1⁄2 then you could withdraw the actual assets you converted without penalty.
Strategies like this can work well. But, in all cases, professional assistance and advice is recommended. These types of transactions need to be looked at closely to help ensure that the after tax results will be favorable.
Mark F. WinnAttorney at Law, PLLC